Good afternoon, everyone. I'm Patrick Davitt, the U.S. asset manager analyst here at Autonomous. It's my pleasure to welcome Invesco back to the conference.
Thank you.
Thanks so much for being here, Andrew. As a reminder, if you want to ask any questions, I'll try to throw them in. You can do it through pigeonhole on your device, and I'll work them in as it make sense.
so maybe to start, Andrew, I think we've all probably had a little bit of whiplash over the last couple of months into last night with the court news. So I think it'd be helpful to get a reset on what you're seeing in the marketplace. Firstly, investor behavior. How has that evolved through the worst of April and now since the earnings call, obviously, with markets opening back up?
Yes. Well thanks for the opportunity. Good to see everybody. It's definitely been a tale of 2 markets. If you kind of would have gone to sleep in mid- late March and woke up today, at the face of it doesn't look different, but it's been, as you know, a lot of whipsawing.
I'll start by saying client behavior or client reactions or client sentiment has been pretty orderly. So -- and I think for a couple of reasons. One, there is a lot of cash on the sidelines. So there's something like 20% to 25% of the average private wealth platform would tell you their clients are in cash. So I think there was already a little bit of a buffer there. I think everything happened so fast that people were trying to react, but it was very orderly, in particular, from wealth and retail.
And then as far as Invesco is concerned, given how diverse our business is and frankly, given the strength of our non-U.S. businesses in EMEA and Asia, which are around $550 billion of our assets under management, we actually had a result of plus $1.5 billion of net flows in April. And while we haven't published our May figures yet, it's trending better in May. So we may have had a different experience. And the strength that we've seen continue to be around fixed income mandates institutionally are still funding. We had a big one in Europe that funded in March and April. China for us is doing -- has done well and continues to flow.
Global equities, in particular, amongst Asian clients has been quite strong. And then in May, the addition we've seen is equity ETFs in the U.S. have really picked up pace in May, where April was quite slow. So we're seeing -- it's not Q1 pace because Q1 was really strong for us, but it's -- I think it's weathered pretty well.
Yes, sure. On that, I think a lot of people were shocked by the solid inflow you reported in April, most of the coverage reported outflows. What would you point to as the key drivers of your outperforming what we saw from other players?
I think it's that non-U.S. base. So I think the -- we've been in the European markets and the Asian markets that we're participating in for decades. We have high-quality relationships. We have depth on the field and in market. And so that's where we saw the preponderance of our inflows, while the U.S. was a little more challenged with some outflows. So back to what I was saying, it was China, onshore China. It was global equities out in Asia, and it was fixed income in Europe was really what drove that performance.
So that's a good segue into China and APAC. Obviously, another topic you're particularly well positioned to address. Firstly, I think you probably have the best domestic Chinese business of the large U.S. managers. So how has that business been tracking through all this volatility? And more broadly, how do you sense any risk of your ability to keep ownership of the platform through all of this tariff volatility?
Can I say a word about Asia more broadly and get on to China for a second. So out in Asia, we think it's one of the great growth opportunities for our business and a place where we have a lot of strength.
So I mentioned about $275 billion of client assets are out in the market. I think owing to how wealth creation is getting formed out in Asia and the transfer of wealth demographic changes, less developed in most of the countries, retirement systems and government reforms in a lot of those markets that are really favorable to asset management and wanting their citizens to be invested into the asset management and capital markets.
So all of those are good for us in Asia where we've been for a long time. The key markets that we're focused on are Japan, China, Australia, Southeast Asia and India. So a lot of the core markets. Before I get to China, I'll say Japan has been maybe the best example of where we bring our global capabilities into a domestic market and a place we've been for decades and now we're seeing the benefits of some of those macro forces I mentioned.
So that business in Japan, we manage now $80 billion for clients, and that's 2x what we managed 4 years ago. And a lot of that growth has come in global equity and global bonds. China, in particular, China is a core market for us in Asia. It's a domestic to domestic JV that we have. It's about $100 billion of assets. Its margins are about 50%. Its fee rate is 35% to 40% basis points. And we've reached high watermarks of those assets to answer your question about how has it been.
The last several quarters, it's been in positive flows. And the last 2 months, even with all of the tunnel that's going on, has also been in positive flows. So we think it's a place that's going to go from strength to strength. It's a domestic business. So the economy -- the quality and the strength of the economy in China, the quality and the strength of the capital markets in China will influence the success of that business.
And the stimulus that's going on in China, the focus on domestic consumption, the government reforms in general, but I think most importantly for Invesco strategically in the long run is the development of the retirement system in China, which they need for that growing middle class, a safety net, a security safety net, and they've been vocal about building out the retirement market. So we're really well positioned for all that. We own 49% of the JV. So we're the minority but we have day-to-day management control. So we feel despite the macro challenges going on geopolitically, the business is in really strong shape.
And no concerns that your ownership, your ability to own something like that could be caught up as kind of collateral damage and all of that?
So the fact that the business there is domestic, domestic, it's walled off all of the investors that we have there are Chinese, all the people doing the investments are Chinese, all the clients are Chinese. It's really pretty domestic. So I don't focus on that.
Great. Another one on APAC. You recently announced selling a stake in your Indian business and keeping, I think, 40%. What was the thought process behind that and the opportunity from doing something like that?
One of the strategic goals for Invesco that we've been talking about the last few years is continuing to simplify and streamline our business while staying focused on the core activities, asset classes and markets. We really like the Indian market. But our ability, we felt to capitalize on the growth in India that a partner would be a wise thing to do.
And just think about my China comments. It's sort of similar. We've had a great partner. So we're able to find a partner that has bank distribution in the financial services space. So we'll be able to participate, continue to participate in the Indian market growth as a minority owner. And in time, is that asset management business grows, there'll be more opportunities for us to sub-advise investment strategies into it, and it has allowed us to take some cash off the table and use it for other sources.
Helpful. What do you think the time line is to getting more of that sub-advisory?
On the Indian side.
Yes, the Indian.
Well, we've got to close the transaction, which hopefully is soon. I think it's going to take -- it's a very domestic business at the moment. So I think it's going to take a little bit of time before they start really deploying into Greater Asia and then to outside. So over the next few years.
So that all sounds great. Probably the most challenged part of your business is active equity. So with the macro discussion in mind, it seems like active equity fund performance has gotten a little better this year, but on average, most managers are still not outperforming benchmarks and most of the large funds we track actually got worse through April volatility.
So with all of that in mind, how are you thinking about the path forward for active equity? When are we going to ever see more traction there? And what do you think needs to change in the industry to kind of get the stubborn trend back in your favor?
Yes. So active equity is a very important to Invesco. I mean, it's north of 35% of our revenues. So it's a key part of our business. More than half of our active equity portfolios are global or international or emerging. So one of the ways that we will see, hopefully, a catalyst in that is as people move away from just domestic U.S. trade and even the more narrow domestic large-cap tech trade, more demand for these global international and emerging strategies, not just here in the U.S. but in Europe and Asia, too.
And we're starting to see some of that traction. I mentioned global equity in Japan. Our EMEA-based clients and Asian-based clients are actually in positive flows in the last quarter for active equity. So I'd isolate it down to it's a U.S. mutual fund topic for us, And it's somewhat getting the demand to come back on the international global side.
I think you also mentioned performance. Active equity managers at this stage need to be performing in the top quartile or decile to win and retain business. And so the bar has gotten very high. And so we spend all of our time ensuring that we have the right leadership on active equities, which we do and single leader on that, which we've put in place in the last few years, that we have the best teams against the capabilities and consolidate the product line and the teams where there's better teams that could be doing it. We've added risk talent and risk leadership to make sure that we have that in place.
And then we keep trying to differentiate the products, be it fees or features. And you could see active ETFs as one of those ways to add features and being competitive in our pricing, which we are. So I think it's a lot of investment quality and then demand change. Look, our ultimate goal is we want to have net flow market share that's greater than our market share of assets in the active equity piece, regardless of market performance, whether it's up, down or indifferent, we want to outperform. And in the U.S., we have a little more work to do.
On the active ETF point, what's your latest thinking on to what extent that's really incremental or just keeping more money in the system. In other words, kind of cannibalizing what's in the mutual funds already?
Yes. I think so much money has gotten pulled to passive from active and some of that's structural, and some of it's cyclical. And I actually think the growth that we'll see in active ETFs is potentially pulling some of that back from past. It's certainly going to be porting it from mutual fund assets into these other versions. But I think the pie can grow when the vehicle that active is housed in is a more efficient tax vehicle for taxable U.S. investors.
Yes, for sure.
So I think it's got a lot of potential.
So summing it up, I think you made some pretty significant realignment and changes to the portfolio management capabilities over the last year. Any anecdotes or helpful updates on how that's impacted performance positively since then?
Yes. I mean, look, our U.S. equity range has delivered some pretty solid performance, and we need to see demand. We've seen pockets of improvement in the international global side. It's still not exactly where we to be. Flow performance, as I said, has picked up materially in EMEA and Asia. So the performance of the strategies in the U.K. and Europe are quite strong. So we're starting to see that trajectory change. The bar just keeps being really high. I just want to remind everybody of that. So you should expect us to just continue to focus on quality number one.
There are some people that are concerned that Europe, in particular, is starting to catch up to the U.S. in terms of the pacification shift and you're seeing a pretty significant uptick in adoption of ETF use. How are you thinking about the potential for EMEA that starts to look a lot more like the U.S. and then you have more of a headwind there, although that you could win on the ETF side, obviously.
I mean maybe it's worth saying for a second, the profile we have in Europe and the U.K. It's about $275 billion of assets, more on the continent than the U.K., it's more active than it is passive, but we have a $110 billion, $120 billion ETF business in EMEA.
So it's substantial, what we're already doing on the passive side with ETFs. I'd say the market in Europe different than the market in U.S. for wealth, it's more institutional. So the notion of talking to private banks, talking to home offices and gatekeepers that make sizable decisions is different in Europe than it is in the U.S. I don't see that becoming more like the U.S. I think in some ways, it's a more institutional market already.
Got it. Okay.
But we're very well positioned there and the flow picture for us, $14 billion of flows out of Europe in the first quarter, and it was a mix of fixed income and ETFs. So it's a good, healthy business, good investment performance, and we bring into those markets strategies that are developed and managed in the U.S. but also -- in Europe, but also in the U.S. and Asia.
So let's take a big step back and maybe reflect on your first 2 years as CEO. What do you think Invesco has gotten right? Where do you see room for improvement? And how are your priorities evolving over the last few months?
Yes. So over the last 18 months, 2 years, we think we've really pivoted the company, I think, from playing more -- some defense to playing offense and taking obstacles out of the way that would allow us to grow. And so I'd characterize those as things like having a much greater strategic clarity that we're executing against, having a more streamlined organization that's allowed us to be much more efficient with our expense base, a much better balance sheet with some of the things that we've done that we can talk about, whether it was with the preferred or debt that we've paid down. We're very focused on these growth vectors that I described and showing growth in those areas.
And we've seen operating leverage in the business. So each quarter last year, sequentially, we grew our margins and quarter over quarter -- first quarter this year or year-over-year, first quarter this year, we grew operating income 18% expanded margins for 4 percentage points. So I think it's starting to play through in some of the results. And so I think really a lot of momentum that we have in the business, there's just some things we need to pull through on the revenue side.
ETFs obviously a big driver of your flow outperformance versus the industry. Could you update us on the trends in the space and how Invesco is growing share amid what is still a pretty significant competition increases?
Yes. So we've been in the ETF space for over 20 years. And what's now an $800 billion ETF, largely ETFs, some passive franchise around the world, started in the U.S. wealth channel, and started with alternative weighted indexes. And we've sort of carried that all the way through as we've grown it from that, from $5 billion, $10 billion we acquired 20 years ago to [$800 billion] today. Mostly organically by kind of sticking to that knitting.
So we try to stay in places where fees are not the #1 decision-making. It's something else. So we've done a lot of these alternative data factored weighted indexes, a lot of unique access indices. And we've exported that into markets where we can win. And the U.S. wealth market is the biggest now in the world, and it's growing at a fast clip, and we've been able to participate in that.
So our -- you mentioned our growth, our net flows have really been about 2x. Net flow market share has been 2x that of our asset market shares. So it's working and it's growing. The business scales incredibly well. So it's very accretive to our firm level operating margin, and we're just going to keep putting more volume through it.
More specifically on this topic, and it fits with kind of the active ETF discussion too. There's a lot of chatter about the ETF share class approval coming through and the potential for that to also keep more mutual fund AUM in the system. What are your thoughts on Invesco going down that road?
Yes. We'll follow multiple paths as the transition goes to active ETFs. I mean we've been in the active ETF space for almost 10 years. We have 22 strategies about $20 billion, and we've got even more assets affiliated with active teams that are passive.
I think this is the first time that I can passionately say that it's going to happen this time where active ETFs are really going to take hold, but I think there's no panacea. So it's not going to happen in a week or a month or in a year, it is going to take time. And there are some limitations of the ETF vehicle. You can't close an ETF. So if you've got a capacity constrained strategy, it's difficult to own international in an active ETF.
You have to disclose your holdings every day. So all the fund managers that have concentrated portfolios is difficult. But it will be one of the ways that it happens. Share classes, we've filed for ours. Share classes of mutual funds will be 1 avenue, generating new ETFs, which is largely what we have done will be another avenue. And then there will be new strategies that come to fold. I think the ETF space has been -- has shown a lot of innovation. We've kind of been at the lead on that. So we're going to have multiple ways to grow the active ETFs and we'll see which one sticks with the clients.
Makes sense. I think Invesco probably has one of the better alts businesses of the more traditional asset managers. So everyone is obviously hyper-focused on retail democratization trend. Could you update us on the products you have in the market? How they're doing? What new product development looks like where you see the most opportunity to launch new products and where you are in expanding distribution for all those products?
That's great. So for those less familiar, we have $130 billion of private market assets and thanks for the compliment. The 2/3 of it is in real estate, real assets, primarily equity but some debt. And the other 1/3 in alternative credit, a lot of structured loans and some direct lending and distressed.
It's almost all been institutional assets all over the world. In the last few years, we've now taken those capabilities into wealth, like many others. We've built out alongside our generalist sales force, specialized distribution force to take those products into market. And we have 3 distinctive strategies in the wealth space, 1 for real estate equity, 1 for real estate debt and 1 that's a dynamic credit strategy.
The real estate debt strategy has had the most traction thus far from 0 to $3 billion in assets over the last 18, 24 months. I think it fulfills a category that there's a lot less supply for. It's on 2 of the biggest wealth platforms here in the U.S. are the 2 biggest and dozens of others. So we hope that flywheel will continue to spend for real estate debt.
We just announced a partnership with Barings at the -- and MassMutual at the -- at our last quarterly earnings, which is going to allow us to extend into those credit strategies and use their distinct capabilities or their distinct management and parts of direct lending and specialty finance and asset-backed lending with our strengths in structured loans and lower end -- lower mid-market direct lending, and we're going to put that together for wealth clients.
And MassMutual is going to feed those strategies, advance those 2 strategies with their capital up to $700 million or so. So we're going to continue to extend. We like the partnership structure that we just announced. It's a good model for us because we feel like we have the distribution, we have the institutional pedigree with high-quality capabilities and we've built this operational element that can scale. You don't need dozens of products here. You just need a few to hit the category, and we'll take that same model beyond the U.S. to Europe and Asia, too.
There's a question from the audience on this. Obviously, a newer trend, but you're seeing some partnerships between traditionally alternative managers and traditional managers. It sounds like what you're doing with Barings fits this theme. Would there be a to look for other partners? Or do you think this is kind of...
So a couple of reasons we got together with Barings aside from them being a very high-quality asset manager. We are connected together with MassMutual with ownership of both companies. We know each other well. And it's an opportunity, we think, to execute relatively quickly. So these products that we're talking about, we want them to be in market very soon. And the teams are familiar with one another. And I think that's distinctive from some other partnerships where people are just getting to know each other, and it takes a while to get capabilities to market. We won't have that situation.
I think the template that we outlined for that, we would like to continue to do partnerships where it makes sense. And whether that's with Barings hopefully or others as well, we've been pretty vocal that we want to grow in this space, but we want to be really disciplined with our capital.
And you're probably closer to the distribution side of this issue than the alternative managers I cover. So what is your latest thinking on how much demand there really is for these kind of hybrid liquid, illiquid product?
Yes. So to be clear, what we're going to do in our strategies is we are going to have a diversified credit strategy that's all private...
It's all private.
And then we'll consider doing public private hybrids. I think they're interesting. I think the wealth platforms definitely have a lot of interest in them, because I think they straddled 2 different challenges they're trying to solve for their clients. They create some more liquidity. I mean liquidity still matters. I mean as much as we talk about illiquidity and the capability of taking wealth clients up to 20%. I mean they care a lot about liquidity when they need it. And I think the public private are good avenue.
So up until now, I think the biggest driver of your alts growth and strength has been real estate. What are your thoughts around trying to build businesses in the other verticals or bigger business in the other verticals?
Well, obviously, real estate been a great asset class for us. We have -- we're a very well-known institutional manager around the world. Extensions on that real estate platform, whether it's infrastructure or other related real asset capabilities is something we definitely keep our eye out for and we really want to make sure we do extensions from things we know very well, real estate would be one of them.
And then on the -- as I said, on the alt credit side, I think what we demonstrated with Barings is if we find partners that can be additive to what we do, but we have this distinctive strength in structured loans and emerging strengths in distressed and direct lending.
In terms of the other sort of sectors, I guess, in alternatives, we're going to be very thoughtful before we get into those, and we're not interested in being the distribution partner where we don't have some investment capability integrated into it. So we're not going to try to be everything to everybody in the private market space.
Got it.
So as I mentioned, Patrick, I mean, you don't need to get on -- to move things forward, you don't want dozens of capabilities and products. A handful of things is fine.
Yes. So taking it all together, I think it's probably pretty clear from everything we've talked about, but what do you think the biggest contributors to organic growth will be in the near term versus medium term and long term?
Well, I think in the short run, it's going to be volatility right now. So I think the short term is probably a little less relevant. So the mid term, middle term, I'd say the need for income and fixed income around the world has been pretty high. And so I think that's -- and that's a part of our business that's I think, underappreciated, a $600 billion fixed income player.
So income is going to continue to be in demand. These private market strategies into wealth will continue to be in demand. I think in the medium term, you're going to see the shift of people redeploying some of their U.S. exposure to international and other markets outside the U.S. I think that's going to drive forward. And I think from a vehicle standpoint, the ETF and the SMA are going to be choice vehicles, whether that's for passive or for active. So those are generally some of the demand trends we see.
Okay. You mentioned cash, right, the amount of cash accounts and obviously, we've seen the money fund flows. There's obviously still a lot in deposits earning 0. If rates really are going to be higher for longer, doesn't cash actually become an asset class? So like is that really on the sidelines? And it's a debate I have a lot with my clients.
I think before the tariff war or whatever we've got going on, I would have said watch rates and just say where rates go how to answer your question. I think now you have to factor in protection and people are thinking about cash as an asset class. I think for some of that dry powder to basically pounds on situations as the world changes quickly.
But I think those balances for the moment are probably -- we thought they were -- they started to go down. We thought they'd get into the teens, and they're still north of [20%]. And that's what we hear anecdotally from our clients. I mean we're not -- we're a money market fund player and a liquidity player, but this is what I hear from platforms in the wealth space.
Okay. Interesting. The other side of the organic growth story is obviously fees and given the shift from active to passive to ETFs, you're obviously well positioned for flows, but that comes with a fee rate headwind. Could you update us on the moving parts there? To what extent you're seeing that headwind abating? You've been talking about a tipping point where maybe the mix gets to a point where it's not as severe.
So there's always a lot of focus on our net revenue yield. And I'd just probably be as clear as I can be, it's not fee pressure, it's really mixed for Invesco. And whether they're some secular and some cyclical, it's been for the industry and us, ETFs over mutual funds, passive over active, short duration over long duration. All of those are lower fee-yielding strategies.
So for someone like Invesco, our asset flow growth is high. We're seeing improvements in our organic revenue growth, but our net revenue yield goes down just as a function of that math. And I point that only to say some of our -- some of the other competitors we have in the marketplace might have flat net revenue yields but declining asset flows. And I rather have our situation. We're not focused on net revenue yield as sort of a KPI. I mean we really focused on operating income and operating leverage and what we do with those net revenue yields.
I mean, the ETF business or our global liquidity business are highly profitable, highly scalable businesses. And so regardless of the asset class, we're trying to optimize for operating income and operating margin expansion. And really, it's not a -- we don't see a lot of fee pressure. We tend to compete in places like our ETF business where, as I mentioned before, fees aren't the first feature.
And in terms of your tipping point, we're seeing organic revenue growth trend up. It's still not at the place we want it to be, but it's trending the right way. So whether you look at net revenue yield or you look at revenue or organic revenue, I think you'll get a different picture.
Got it. Aside from the revenue yield expenses has probably been one of the biggest frustrations for a lot of us, particularly [indiscernible] the NextGen implementation. We got some interesting news this week that you're actually going to keep the platform and a hybrid platform, including both Alpha NexGen and BlackRock's Aladdin. So firstly, could you speak to what is behind that decision? And does it give you more visibility on the end data now?
Yes. As I answer that, just on the expense side, I mean our expenses -- it's been an area we've been very focused on, and I think pretty disciplined on. So expenses are -- we took $60 million out of the business last year while reinvesting and growing. So expenses have more or less been flat to down over the last year or 2 in spite of all the other things we've been doing to grow and some of your comments.
On Alpha, just to reorient people, we had made the decision several years ago to move all of our assets on to the State Street Alpha platform from various different places than they had been before. And we've been working through that implementation for quite some time.
We made the decision and announced it this week that we're going to move to what we're calling a hybrid approach, which means finishing all of the movement of our equity assets on to State Street Alpha, using State Street as the middleware, so to speak, and then remaining with fixed income on Aladdin, which is where we are today.
State Street's has been a great partner and will continue to be a great partner as Aladdin BlackRock. We think this will reduce the time to completion. So we want to be finished by the end of '26. We think we can generate virtually the same benefits that we were going to get out of simplifying because we're getting down to just 1 platform, 2 providers from hundreds and dozens of systems and processes that will consolidate. And the run rate cost that we'll have going forward will be more or less the same as if we were on a single platform. So we just wanted to get certainty to completion. We're on fixed income Aladdin today. So we just don't need to convert to something else, which reduces the time.
So you don't -- just to put a bow on it, you do not expect this to decrease the potential expense synergies from having just the 1 platform.
We really believe we can achieve virtually the same and get the other benefits that come from it as well.
Okay. And then higher level, to your point, you have been good on expenses away from this issue. How are you thinking about those kind of core expense run rates going forward? Are there other places you can look for savings?
Yes. Look, as I was starting to mention -- sorry, I mean to get in front of you, but expense discipline has been important both in how we're more efficient with what we're doing, but also how we're deemphasizing and emphasizing other things so moving money around.
Like I said, we've been able to take $60 million out last year while investing in all the things I was talking about a little while ago. So we think there's always room to continue to find operating efficiencies. About 25% of our expenses are variable that's largely compensation. And we've been talking about we could flex that to 30%, 35% with some intervention from management decisions that we would make choices or slowing down in different situations. But we feel really good that we've invested in all of these growth areas. And from here, revenue growth has a higher incremental margin.
On that, -- as we think through all of these issues, obviously, stronger organic flow growth, revenue yield, expenses, Alpha NexGen noise going away. How would you rank the things that need to happen to drive significantly more positive operating leverage from here?
Yes. It's a good question. So one of the things, as you said, we've really been focused on is going out of the offense like earlier and getting some of these maybe obstacles to growth out of the way. Now that we think we've progressed past that, I'd probably put it in 3 buckets. So bucket 1 is I'd say, parts of our business that scale really well and are in high demand, and we have a discernible strength. What falls in that is ETFs, fixed income and SMAs could all be margin enhancing and leverage improvement.
The second bucket I'd put around growth areas that maybe don't scale as well, but they have high growth potential and relatively high fees. That would be private markets into wealth management, and that -- that would be the Asian region and China, things like that, that really could accelerate the revenue and the revenue mix. And then also in that would be defending and growing in pockets of active equity. So if we can reduce the redemption rate of active equity, that has a significant impact on the margin.
And then the third bucket would just be on the expense and efficiency side. So continuing to look to rationalize where we can and be really disciplined on the cost side. So any combination of a few of those work, not all of them, and you can start to see a pretty different picture for the company.
This morning, in a group meeting, I sat in on, we had an interesting conversation specifically on kind of the tipping point on positive operating leverage in the ETF franchise and how that's tracked. It was kind of a headwind for a while it's obviously shifted more positively to a tailwind as a lot of your marquee ETFs have gotten bigger. Could you kind of speak through that evolution and where you are, I guess, in terms of scaling those ETFs to a point where the additive to the margin?
Yes. Most all of the ETFs we have -- we don't have a lot of small ETFs. I mean, we have a little bit of a back book that you -- it rotates into favor and out of favor. The size of our business at this point and the investments we've made around distribution and technology, which are -- and the people that run the ETF business are basically your costs. the margins expand pretty rapidly from here.
And I'd say even in our business where we were already large 3 or 4 years ago, as we've layered on hundreds of billions of assets since then, the margins have expanded by 10 to 15 percentage points even in that business. And they're already -- we're already well accretive to our current margins. So I don't know what the situation was you're talking about with the other company, but it's not just at the fund level, it's at the franchise level, because fund scale, but then the franchise scales, too.
Got it. One from the audience on China on the option to buy in more. I think you've had an option for a while now. What's the latest thinking on potentially doing that?
Yes. We're really not focused on it...
Not focused at all. Okay, maybe for obvious reasons.
At the moment, I think maybe for obvious reason and also what we're doing today is working. So -- and don't mess with the good thing.
Got it. I'll finish up on capital. I think a lot of us are happy to see you finally get some movement on taking down the $4 billion preferred at MassMutual. Maybe for those that aren't as familiar with the situation, could you kind of update us on the structure of the paydown and the opportunity to bring it down further over the longer term?
Yes. Our capital priorities haven't really changed at all, invest back in the business, get our payout ratio between 40% and 60%. It's near 60% today through dividends modestly increasing and buybacks, which we got back into the market last year routinely buying back once we had hit 0 net debt ex the preferred on our balance sheet. So coming into this year, and we've been paying down all the debt around the preferred and the preferred was a $4 billion piece of paper.
And as we were hearing more from investors that this was viewed as debt and maybe a more permanent instrument that wasn't going to retire for a long time, we started to talk with MassMutual, who's also an equity holder in the company and we found the opportunity to -- that works for both of us to retire $1 billion of that preferred, which we did and replaced it with short-term callable term loans, so we can pay that down as we wish.
And we also left open, it's got to be a 2-way transaction with us in MassMutual. I think we also left open the notion that we can do more -- as those stars continue to align, and we could have done more, I think, even in this iteration. All that said, it just gives us much more flexibility with our capital to determine what we want to do through that same priority stack, but we have debt retiring at the end of -- at the beginning of January or beginning of next year.
We'll continue to look at these term loans. We'll continue to look at the preferred while making sure that the payout stays in returning capital to shareholders. So it just opens up the playing field, I think, for a lot more avenues for us to explore. I think it also takes the skepticism away from some investors that viewed it as this permanent thing sitting there, we couldn't move, and clearly, it's not.
Yes. I definitely hear that from a lot of people. So I guess expanding on that, has there been any shift in kind of the priorities between balance sheet improvement, buybacks, dividends and then, I guess, M&A. And to what extent is M&A really in the mix?
I think M&A is way down. And I think, as I said, that sort of balance between the payout ratio, which will keep between 40% and 60% and last quarter it was 58% or 59%. So we want to be at the higher end of that. And that will probably be more buybacks than dividend and we'll do modest dividend increases, but we want to continue -- we're going to be routinely in the market, buying back stock, bought back $100 million last year.
We'll keep that pace, but if we see opportunities, we'll buy back more and then really looking at the balance sheet after that and I talked about. And now we have a lot of flexibility to continue to delever as it were. And excess, all that goes with investing back in the business which we've been able to do. So I think M&A is way down there, the partnership structures we are talking about. There's ways to grow inorganically that you don't have to write a check for.
Yes. I think on this point, the India stake sales should generate a fair amount of capital. I don't know if it's public, how much.
I don't know if we've disclosed it or not, but it...
How should we think about the potential for that to drive any kind of accelerated repurchase or dividend. Is that in the mix or would it just be...
I think we'll make that decision kind of when that closes. We're waiting for regulatory approval, but all those -- all those options are on the table.
Got it. Cool. Well we finished a little early. That's all my questions.
That's incredible.
And I got through all the audience questions. So thanks a lot.
Thank you.
Good time.
Good to see you.
